G-2004-27

Co-op Advertising: A Manufacturer's Counterstrategy to Store Brand

We study whether the introduction of a private label could be profitable for retailers
and manufacturers. We also investigate if cooperative advertising could be
considered a manufacturer’s counterstrategy to the store brand’s harmful effects. The
literature that dealt with the issue of private label introduction was mainly concerned
with pricing strategies. However, this problem has not been addressed considering
other marketing efforts (flyers, displays, etc.). In this paper, we consider a distribution
channel formed by one manufacturer and one retailer, and propose a game theoretic
model that accounts for marketing efforts for the national brand, in addition to retail
prices. Results are found by comparing outputs from three Manufacturer-Stackelberg
games: 1- the retailer offers only the manufacturer’s brand; 2- the retailer sells a private
label in addition to the national brand; 3- the manufacturer offers a co-op advertising
agreement to the retailer. Our findings generalize previous results and show that the
private label introduction is profit-improving for both the retailer and the channel although
it could harm the manufacturer’s profits. We show however that for a specific
range of the retailer’s advertising efficiency and of the price competition intensity, the
manufacturer could profit from the private label introduction. Further, our findings
suggest that the coop plan is be an efficient counterstrategy for the manufacturer. Our
model also predicts that the retailer would accept the implementation of the coop plan
only if the national brand competes strongly with the private label.

Publication

GERAD

GERAD is a multi university research center founded in 1979, financed by FRQNT.
It involves some seventy experts from a mix of disciplines: quantitative methods for management, operations researchers, computer scientists, mathematicians and mathematical engineers, from HEC Montréal, Polytechnique Montréal, McGill University and Université du Québec à Montréal.